Creating a legacy – dividend portfolio for kid(s)

When I first started investing in dividend paying stocks, I kept coming across statements like the one below to show how powerful dividend reinvesting is.

If you invested $5000 in (Insert a stock symbol) in 1970 and compound dividend received since, you’d have $(insert insane large amount of money).

I would always ponder why I didn’t start investing in dividend stocks earlier. Just imagine what my annual dividend income would be like today, if I had started when I was in my early twenties, roughly 10 years ago. This is one of the reasons why I always enjoy reading articles from “younger” bloggers about their dividend investment journeys, bloggers like Henry at Living at Home, Dividend Mongrel, No More Waffles, and Lenny & Bert at Dividend Diplomats.

Now to put the above example into a bit of perspective…

If you invested $5000 in MCD on Dec 31st, 1970 and compound dividend received since, you’d have $2,142,857.14 as of December 10th, 2014. An annual return of 14.78%.

If you invested $5000 in JNJ on Dec 31st, 1970 and compound dividend received since, you’d have $1,106,666.67 as of December 10th, 2014. An annual return of 13.07%.

Pretty decent returns for leaving your money in the stock market for 44 years don’t you think?. This is a perfect example of power of compound interest. It’s amazing that a 1.71% annual return difference over 44 years means a difference of $1 million dollar! This is why if you’re investing in ETF’s or mutual fund, management fee ratio (MER) matters!

Before Baby T was born, Mrs. T and I spent quite a bit of time planning how we want to invest on his behalf. As any parent would know, post secondary education costs in North America can be significant, so it’s a good idea to start an educational fund as early as possible. This is where Registered Education Savings Plans (RESP) comes in. Opening up an RESP for Baby T and contributing $2500 each year was a trivial decision. By investing $2500 per year, the Canadian government will automatically contribute $500 each year for a lifetime limit of $7,200 thanks to Canada Education Savings Grant (CESG). We’d be dummies to say no to a 20% guaranteed return! Although the RESP decision was a trivial one, I had some concerns for deploying dividend growth investment strategy using Baby T’s RESP account.

Limited annual contribution room With only $2500 annual contribution room, this limits the number of companies that we can buy enough shares to enroll in synthetic DRIP with discount brokers. To enroll in synthetic DRIP for a Canadian blue chip stock like Fortis (FTS.TO), we would need to invest about $5000 first. For the dividend growth investment strategy to work fully, we want to start DRIPing right away and take advantage of the power of compound interest.

Withdraw timeline & rules Since RESP is a savings plan for post secondary education, when the RESP beneficiary (Baby T) is ready to go to a post secondary institution, he will start withdrawing money from the account. If Baby T doesn’t go to a post secondary institution right away when he graduates from high school, the withdraw can be delayed until he is 35. We can also transfer his RESP to his sibling (meaning we’d need to have another kid! Get to work!?), or we can collapse his RESP and pay taxes. Unfortunately, all these scenarios require selling of the principal. Since the main strategy for dividend investing is to live off the dividend income and never touch the principal, the idea of selling the principal makes me slightly nauseous.

Due to these concerns we decided to deploy passive investment strategy and invest in index ETF’s. However I was not satisfied…

“Knowledge become power only when we put it into use.”-Anonymous

With all my knowledge about power of compound interest, it would be a shame if we don’t put this powerful force to work. For Baby T, and our future kid(s), Mrs. T and I want to create a legacy. What’s the best way to fulfill this dream? For us, it means creating a dividend portfolio for Baby T. The idea is simple, open a in-trust account (note: this is a regular account), allocate some money, buy a handful of dividend paying stocks, and DRIP away for many many years. To enroll in full DRIP, share certificates for the desired company needs to be purchased and a bunch of paperwork needs to be filled out. It is also very likely that we need to deal with multiple transfer agents and there will be no one central place to check the overall portfolio. Not an ideal set up.

ShareOwner offers dividend reinvestment of fractional shares (full DRIP). Best of all, it is the only investment broker in Canada that allows the purchase of a specific dollar amount of each stock or ETF. The one-time brokerage fee is $40 per order, so if you place an order of 10 stocks or more, the commission is already cheaper than Questrade’s standard $4.99 stock commission.

Before going further, we took a quick look at ShareOwner’s list of eligible stocks and ETF’s to confirm that the dividend paying stocks we have in mind are listed on ShareOnwer’s purchasing and DRIP plans. We were happy to see that all the stocks I had in mind are listed. The tough decision was determining the total number of stocks to own.

The idea of giving Baby T a dividend portfolio is to provide him with more opportunities in the future. We believe that by having a passive income, this will open a lot of opportunities for Baby T when he becomes an adult. There are already a lot of plans being put into place on teaching Baby T about money, personal finance, and investing once he’s a bit older (he’s only 1 right now!). We will get him involved with his portfolio once he’s a bit older to start the money education. The goal is to teach him to appreciate the value of having a dividend portfolio and having money working hard for him.

We decided to select 15 dividend growth companies. Since the timeline of the portfolio is 35+ years, we targeted high dividend growth companies. Below are our selections and reasons behind each selection.

BlackRock Inc (BLK) BlackRock Inc is the company behind iShares ETF’s. A lot of people buy iShare ETF’s in their portfolios and owning BLK is a great way to profit from the recent ETF craze. Paying dividend since 2003, BlackRock has also been growing dividend at very significant rate. It has a 10 year annualized dividend growth rate of 32.6%.

Walt Disney Co (DIS) Every kid loves Disney because the theme parks and the entertaining movies. Disney has done quite well the last few years and has increased its dividend at a 10 year annualized growth rate of 15.3%. I would love to bring Baby T to Disney World one day and tell him that he owns part of the theme park.

Enbridge (ENB) There always needs a way to distribute energy across North America and this is where Enbridge comes in. I see Enbridge as a very stable business with a wide moat. Enbridge has a strong dividend growth history, paying dividend since 1990 with a 10 year annualized dividend growth rate of 12.22%. Enbridge demonstrated the strong dividend increase history by announcing a 33% dividend increase recently.

Fortis (FTS) Fortis is one of the Canadian dividend aristocrats, having increased dividend for 40 years straight. This is a company that every Canadian dividend investor should hold in their portfolio.

General Mills (GIS) I picked General Mills simply because of its wide selection of cereal and yogurt brands that Baby T will become very familiar with once he’s older. GIS has been paying dividend for 116 years uninterrupted and without a reduction. That’s a pretty impressive history to me. On top of the impressive dividend streak, GIS managed to grow its dividends the last 10 years at an annualized rate of 9.95%.

Johnson & Johnson (JNJ) Johnson & Johnson is yet another company that every dividend investor should hold in their portfolio due to the long history of dividend increases. JNJ has increased its dividend for 51 consecutive years and this trend will most likely continue moving forward. JNJ’s 25 year annualized dividend growth is an impressive 13.07%.

Procter & Gamble (PG) Just like JNJ, Procter & Gamble is a company that every dividend investor should hold in their portfolio considering PG has increased dividend for 57 years consecutively. I’m sure Baby T will be very familiar with P&G products when he gets older.

Qualcomm (QCOM) Smartphones have become something that is heavily integrated into our daily lives. Qualcomm has benefited from the smartphone revolution. With Internet of Things picking up, Qualcomm will continue growing its revenues and continue its dividend growth. Qualcomm started paying in 2003 and has a 10 year annualized dividend growth rate of 26.9%.

Royal Bank (RY) Royal Bank is one of the big five banks in Canada with low PE ratio and good growth potentials. RY has paid dividends since 1870 and has continued to grow its dividend. Royal Bank didn’t increase its dividends during the great recession but unlike many American banks that cut or suspended dividends, Royal Bank did not cut or suspend dividends during that period. Royal Bank has been around for years and will be around for many more.

Shaw Communication (SJR.B) Shaw provides internet and cable services in Canada. This is a very stable business with not a whole lot of surprises. SJR.B has a monthly dividend distribution which allows Baby T to compound his portfolio at an even faster rate.

Suncor Energy (SU) I wanted to have a Canadian oil company in Baby T’s portfolio and settled on Suncor. With a 10 year annualized dividend growth rate of 21.98%, Suncor has very strong dividend growth history and I believe the Suncor board will continue to reward their shareholders moving forward.

Telus (T) Out of all 3 Canadian wireless carriers, I believe Telus has the highest future growth potential. Telus has paid dividends since 1999 and has a 10 year annualized dividend growth rate of 13.67%.

TD Bank We decided to select TD Bank for Baby T’s dividend portfolio because we use TD for our banking services. TD has paid dividends since 1857. Similar to Royal Bank, it has a long dividend growth history. TD has a 10 year annualized dividend growth of 10.16%.

Visa (V) A well-known brand worldwide, Visa has been making money left, right, and centre. Visa started paying dividend in 2008 and has a 5 year annualized dividend growth rate of 45.93%. For long-term investor like Baby T, Visa will supercharge his dividend income in the very near future.

Verizon (VZ) Verizon provides wireless voice and data services in the US. Verizon is one of the biggest cellphone providers in the US and has paid dividend since 1984 with a 5 year annualized dividend growth rate of 4.82%. The growth rate isn’t very high because the initial dividend yield is already quite high at 4.7%. I believe Verizon will continue growing and expanding its empire in the future.

With some capital reallocation and some help from Grandma & Grandpa T, we managed to contribute $12,000 into Baby T’s dividend portfolio. The current forward-looking dividend income is $323 which is a yield on cost of 2.69%. The current yield on cost is lower than your typical dividend portfolio but Mrs. T and I have constructed this portfolio for dividend growth with 35+ years of timeline set in mind. We expect the yield on cost to significantly increase over the next decade and will continue increasing as Baby T gets older.

We plan to create similar dividend portfolio(s) for our future kid(s) too. 🙂

What do you think about Baby T’s dividend portfolio? Do you think creating a legacy by building a dividend portfolio to your kid(s) is a good idea?

Hi I’m Bob from Vancouver Canada, I am working toward joyful life and financial independence through frugal living, dividend investing, passive income generation, life balance, and self-improvement. This blog is my way to chronicle my journey and share my stories and thoughts along the way.
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Tawcan

M

December 13, 2014 at 3:28 pm

Omg this is awesome! You’ve got a fantastic list of qualify stocks that’d make a great portfolio for anyone, not just kids. We’ve set up a pension and an investment account for our child too, I’m hoping it’ll give him some great opportunities when he turns 18

Tawcan

Income Surfer

December 13, 2014 at 6:30 pm

Baby T is clearly very blessed. You guys have some great programs up there, but I see you guys are taking it to the next level. My father got me interested in my teens, and I have to say the dividend growth has been astounding.

For our little man, we haven’t settled on the best route. I know it’s a first world problem, but we’re working on it! -Bryan

Tawcan

Special Agent Dividend

December 13, 2014 at 10:50 pm

I love this strategy for Baby T, as he is lucky to have parents like you. He will be so far ahead of the game when he is an adult. The list of stocks you picked is truly remarkable and well diversified. I’m hoping to set up our little ones soon with some long term DRIPs and let compounding take over.

Tawcan

Tom

December 14, 2014 at 8:58 am

Mind if I ask what type of account (non-reg, TFSA, etc) do you plan on utilizing for these investments? If in a non-reg, how do you plan on handling the withholding tax for the USD stocks (i.e. V, PG, JNJ, GIS)?

I have three kids of my own (11, 7, and 4) and, while we’ve started an RESP for all of them, I would like to do a similar approach for longer-term savings (i.e. house down-payment). My original thought was to utilize a non-reg investing account under my name, but I know I will be limited to Canadian-only stocks to avoid undesirable taxation (i.e. USD stocks, REITs).

Tawcan

December 14, 2014 at 5:26 pm

Hi Tom,

Baby’s T’s dividend portfolio account is non-registered. With ShareOwner they automatically take the 15% withholding tax on dividends received. The left over amount is then used to purchase additional fractional shares. Getting dinged 15% on US dividends is not ideal but I can deduct the amount in tax returns. I thought about investing in Canadian only stocks to avoid undesirable taxation but it’s too hard not to pick solid international companies like V, PG, JNJ, and GIS. Canadian stocks are just too focus in the financial and energy sectors. Mrs. T and I wanted some diversification in different sectors and have some international exposures. If you noticed, all the US stocks that we picked have international exposures. Since this is a regular account, we wanted to avoid any complicated math. This is why we didn’t pick any REITs or income trusts.

First – thank you very much for the mention – so humbling! Your article is the essence of starting early and watching that egg hatch, blossom and grow. It’s amazing what the power of time can really do for your portfolio, which is why I am very bullish on adding capital the portfolio, week after week and month after month. I keep telling myself – the more I can put in now – the more can be compounded for many years and that you will see the impact in a lesser time frame. I am a huge advocate, as you know, with DRIP investing and I’m pumped you’re going for it within the account as well – all solid names, high dividend growth yielders you have in there! I know it’ll work out just perfectly, excited for you. Thanks again, and appreciate all that you write about! Talk soon.

Tawcan

December 14, 2014 at 5:27 pm

Hi Lenny,

You’re very welcome. It’s great to start the journey early so whatever money your planted can grow into a gigantic tree. The power of compound interest is very powerful and it’s so great to see younger investors like you taking advantage of it.

Thank you for the mention. I wish my parents would have known more about investing when I was younger. I am sure baby T will be very thankful of your decision in holding these investments. It’s nice to see some of the same names in my portfolio. Have a great weekend.

Tawcan

December 14, 2014 at 5:29 pm

Hi Dividend Mongrel,

You’re welcome. 🙂 I think most of us wish our parents would have known more about investing when we were younger. But you can’t change the history so all we can do is invest now and grow our portfolios.

Although the tax benefits is nice in the RESP, when I do have children I will try to teach them about personal finance as well. Personally I don’t believe in making my kids a trust fund baby and I believe that they should find their own way in the world. Perhaps that will change when I actually have kids though. : ) Nice portfolio!

Tawcan

December 15, 2014 at 10:46 am

Hi Jeff,

I don’t believe in trust fund baby either. The plan is to teach Baby T as much finances as possible so he would appreciate the fund and use it for his advantage. I do have control over the fund till he’s 18 so we have lots time to teach him stuff.

Kids should find their own way in the world but having some fund available to them will open more opportunities.

Dividend Venture

December 15, 2014 at 8:31 am

Hey Tawcan,

Very interesting post. I am quite young and like you, I read all those “If you had invested $X in company Y you would now have $$$$$$$” and wonder, will I be in a place like that in some decades? Will I leave a massive inheritance for my children?

Actually, what I find an interesting thought exercise is thinking about what happens if you invest like this and then leave your investments to your children who continue doing the same. Apart from a catastrophe, your wealth would compound massively.

Tawcan

December 15, 2014 at 10:48 am

Hi Dividend Venture,

I’ve read some books about that, setting up funds for your kid(s) and they’d leave the investments and pass them to their kid(s). It’s very impressive what the power of compound interest will do to the investment. It would be awesome if down the road the kid(s)/grand kids/great grand kids/whatever generation decides that they don’t need the money any more and donate it all to charities. That’s the best scenario that I have in my head. 🙂

Tawcan

Chris

December 15, 2014 at 12:21 pm

Just curious – do you have to report the dividend income on your own tax forms until your kiddo is 18? I think this may be the case. Does this make any difference to your strategy, or not really? Thanks

Tawcan

December 15, 2014 at 12:50 pm

Hi Chris,

Yes I’ll have to report the dividend income on my own tax form until he turns 18. This doesn’t make any difference to our strategy since I’m already reporting dividend income from our dividend portfolio anyway. Dividend income is very tax efficient.

Roadmap2Retire

December 15, 2014 at 1:56 pm

Great article, Tawcan. Even though we dont have any kids yet, its something that I have thought about in the past. I have no idea how to do estate planning and will need to spend some time figuring things out and consult on that topic. But I like the idea of picking a broker where even partial DRIPs are supported.

Btw, one question: When you say in-trust, does that mean its a taxable account? Or is there a tax shelter on that kind of account?

Tawcan

That is a really good thing to do for your kids. I think this will do wonders for your kids in terms of motivation when they see the magic really happen with compounding. My parents have absolutely no idea how companies or stock market works. My father never invested a single cent in his life. My mother investing in only GICs and canadian saving bonds.

I had absolutely no investment knowledge when I started in 2010.

Derek Foster wrote a book a few years ago called the Lazy Investor. I have two stocks through the transfer agents. One of my positions in Enbridge and Scotia Bank.

Tawcan

December 16, 2014 at 12:12 pm

Hi Investing Pursuit,

I didn’t have much investment knowledge when I started either. It really drove me to learn and absorb all the information I can find. I’ve read Lazy Investor a long time ago and setting up a dividend portfolio for Baby T is a result of reading the book.

Colin

December 1, 2017 at 8:08 am

Bob,

what an amazing legacy, you are creating something wonderful with this. I have two kids now, 1 & 4 and have an RESP that has about $11K in it, however it’s invested in a Mutual Fund Comfort Growth portfolio at TD. If I want to move that to a ShareOwner situation like you did, what is the process? Will I suffer moving it from Mutual Funds into a non registered DRIP account? Also, when you say in in-trust account, what exactly does that mean?

I love your blog, I feel so energized about my future since finding it. Next time I’m in Vancouver I’ll have to buy you lunch.

Moving from one RESP to another RESP should be OK as long as you do a registered transfer. You probably would need to submit registered transfer document through ShareOwner. It’s probably best if you check with ShareOwner directly when you set up an account with them.

My mission is to show that financial independence is indeed possible for a family with kids while living in an expensive city like Vancouver.

My focuses include dividend & ETF investing, financial independence, early retirement, happiness, fruguality, and finding the right personal balance between saving for the future and enjoying life today.